The benchmark rose 0.9 percent to close at 7,027 points, its highest close since May 6.

"The index is at critical levels and a lot of people are buying after it broke the 7,000-point level," said Karim Hosny of Pharos Securities, adding that the next resistance level is at 7,400 points.

Investor appetite for equities was renewed by an off-budget stimulus plan to inject up to $3.4 billion into the economy, traders said.

Index heavyweight Orascom Construction led gainers, climbing 1.8 percent and taking the biggest share of trading volume.

Orascom Telecom (OT) rose 0.2 percent after CNBC Arabia quotes its chairman as saying the firm will seek international arbitration soon in a dispute with Algeria's government over OT's unit Djezzy.

"Investors see this news as positive for OT, but it's too early to say what will happen," Hosny adds. "This is seen as OT's last resort."

Lenders also advanced in Saudi Arabia, with Al-Rajhi Bank advancing 1.2 percent, to close at a near eight-month high. The Tadawul All-Share Index (TASI) ended 0.53 percent higher at 6,616.9 points. The sector activity for the day was mostly positive with 11 out 15 closing with gains ranging from 0.01 percent by the Agriculture & Food Industries sector to 6.84 percent by the Media and Publishing sector. On the other hand the losing sectors were ranged from 0.04 percent by the Telecommunication & Information Technology sector to 0.46 percent by the Building & Construction sector. The overall market breadth for the day was positive with 86 advancers against 30 decliners giving it an AD ratio of 2.86, the Financial transaction House (FTH) said in its daily market commentary.

The Saudi stock market turnover reached SR2.70 billion.

In Kuwait, banks registered gains, as investors bet on a strong rally in the sector next year.

National Bank of Kuwait (NBK), the Gulf Arab country's biggest lender, rose 1.4 percent to its highest value in at least two years. Gulf Bank climbed 3.6 percent.

"Banks are expected to do well next year as most of them earned good profits in 2010 and they will be clear of provisions next year," said Essa Al-Hasawi, assistant manager at Zumorroda Investment Co. in Kuwait.

"Most have posted profits in their third-quarter earnings report. This means dividends can also be expected."

NBK posted a 5.7 percent rise in third-quarter net profit.

Telecom operator Zain dropped 2.6 percent, after gaining the previous day, but volumes were very low.

"Trading volumes are half of what we usually see on Zain. Investors are waiting for a final word on its deal with Etisalat," Hasawi said.

Last week, a Kuwaiti court dismissed a lawsuit from a Zain shareholder unhappy with a $12 billion bid for a stake in the firm, clearing one key hurdle for buyer Etisalat.

The index ended 0.3 percent higher at 6,939 points.

The Dubai index was flat at 1,603 points. The Abu Dhabi index rose 0.3 percent to 2,703 points.

The Qatari index dropped 0.9 percent to 8,646 points.

The Bahraini index rose 0.1 percent to 1,428 points.
 
- With input from agencies